GSK Problems In Evaluating Financial Statements Accounting Essay

This study summarises the fiscal public presentation of the Glaxo Smith Kline. I have analysed the alteration in portion monetary value of Glaxo Smith Kline in the recent old ages and pointed out the grounds for the alteration. Fiscal public presentation of the company has been analysed by ciphering different relevant ratios such as Return on Capital Employed, Asset turnover ratio, etc. Cash Flow Statement has besides been used to discourse the fiscal public presentation of Glaxo Smith Kline. This Report besides shows the jobs faced by the users while measuring the fiscal statements of Glaxo Smith Kline in peculiar and the statements in general.

Introduction:

GLAXO SMITH KLINE was formed in the twelvemonth 2000 when GLAXO WELLCOME LTD AND SMITH KLINE BEECHAMS LTD merged together. The history of the company goes to around eighteenth century. It is a major planetary health care group which is engaged in the creative activity and find, development, industry and selling of pharmaceutical merchandises including vaccinums, over the counter medical specialties and wellness related consumer merchandises. It is one of the taking health care groups in the universe. The company has grown from strength to strength in past few old ages. Following study analyses the public presentation of Glaxo Smith Kline over the past few old ages. The study is all about the alterations in the portion monetary value, treatment on fiscal public presentation and jobs of analyzing and measuring the statements of the company.

Glaxo Smith Kline prepares its fiscal study on the footing of IFRS ( International fiscal coverage criterions ) as adopted by the European Union and besides with guidelines issued by IASB ( International accounting standard board ) . The company ‘s fiscal statement is drawn in sterling and harmonizing to IFRS ACCOUNTING presentation. It comprises of income statement, balance sheet, a hard currency flow statement, statement of recognized income and disbursal and notes to the fiscal statements.

SHARE PRICE ANALYSIS:

Glaxo Smith Kline is a public listed company and it is listed on London stock exchange and New York stock exchange. The portions of the company are traded in the market. In the last few old ages, it has seen tonss of ups and down in the monetary value of the portions in the market. The graph below shows the motion in the monetary value of the portions of GSK in the last three old ages.

The portion monetary value of Glaxo Smith Kline has been changing in the last few old ages. The portion monetary value is around ?14 at start of the twelvemonth 2006. Company earned a really good net income as compared to last twelvemonth and paid rich dividends in 2006 which in bend increases the monetary value of the portion from ?14 to ?16 at the terminal of 2006. The portion monetary value falls at the start of the twelvemonth 2007. This is because of their major restructuring programme. Due to this programme the company incurred tonss of cost which brought the Gross Profit ratio down. But in mid 2007 the portion monetary value additions from ?13 to ?14.10. The monetary value of the portion was ?14 at the start of the twelvemonth 2008 which decreased drastically to ?9.85 in the mid 2008. Besides Gross net income of Glaxo Smith Kline has gone down which has resulted in autumn of portion monetary value. The stockholders keeping have besides gone down from ?1503m to ?1415m in 2008 which is another ground autumn in portion monetary value.

RATIO Analysis:

Glaxo Smith Kline has grown from strength to strength from its formation. The fiscal public presentation of Glaxo Smith Kline has ever been good.A Financial public presentation has been analysed in conformity with IFRS as adopted by European Union and besides IFRS issued by the International Accounting Standards Board. Efficiency and fiscal public presentation of the company is analysed by ciphering different ratios. Harmonizing to Alexander and Nobes, Ratios are techniques for showing the net incomes construction, profitableness, liquidness and potency of concern administrations ” .

Liquidity ratio is one of the most of import ratios to judge the short term liquidness place of the house. Liquidity ratio compares current assets to current liabilities which mean that how will tauten run into its short term duties. Liquidity ratio is dived into current ratio and speedy ratio. Current ratio means current assets divided by current liabilities. The standard current ratio is 2:1. Glaxo Smith Kline has a current ratio of 1.68 in 2007 and 1.72 in 2008. An addition in current ratio shows betterment in the liquidness place of the company. This helps keeping the repute of the company. But Current assets are financed by the either adoption or equity capital which includes a cost with it. Quick ratio means how speedy the current assets convert into hard currency. Gsk ‘s speedy ratio was 1.2 in 2007 and 1.3 in 2008. The ratio is good as the idle is 1:1.

The most of import ratio which shows the efficiency of the company is Return On Capital Employed. This ratio analyses the efficiency of concern as a whole. In the context of Glaxo Smith Kline the return on capital employed ratio in 2008 was 73.1 % which is really low as compared to old ages earlier. This is because of Glaxo Smith Kline has increased its long term adoption from ?7067m in 2007 to ?15231m in 2008. Return on capital employed is affected by company ‘s major restructuring programme which has led into a autumn in the portion monetary value of the company. This programme has reduced company ‘s overall net income and hence reduced return on capital employed.

Another ratio to be considered is the gaining per portion or PE ratio. EPS has fallen in 2008 as compared to last 2 old ages. The PE ratio is still high which means investors are endorsing the direction. But a little autumn in PE ratio indicates a deficiency of assurance in the investors in the company. The stockholders investing depends on the earning per portion.

Gross net income ratio indicates the profitableness of the company. The gross net income ratio ( 73.65 % ) of Glaxo Smith Kline has decreased somewhat in 2008. The lessening in the gross net income ratio has resulted in autumn of portion monetary value in last twosome of old ages. This is chiefly because of major reconstituting programme in the twelvemonth 2007. In October 2007, Glaxo Smith Kline announced new Operational Excellence restructuring programme which was approved by the board for the execution of elaborate program. A 2nd formal program was besides approved by the board and was announced in February 2009. These programs include all the countries of GSK ‘s concern, including merchandising and fabrication and R & A ; D. But because of the major restructuring programme at that place has been many closing of fabricating sites in UK, staff has been reduced and they have incurred a foreign exchange loss due to settlement of the company. This ground has besides brought a dip in the portion monetary value of the company.

Tax return on equity ratio is another of import tool to judge the effectivity of the company. It compares net income of the company with stockholders equity. The return on equity ratio was 54.29 % in 2007 and 58 % in 2008. This ratio is after including the restructuring cost. The addition in the ratio is a good indicant for the company. The company portion monetary value has still fallen despite the addition in return on equity. There is a lessening in maintained net incomes in the twelvemonth 2008 as compared to 2007 which has led to an addition in the return on equity. The portion monetary value down because the there is an addition in demand of the portions of the company.

Asset turnover ratio is another of import ratio which can steer user to the fiscal public presentation of the company. Asset turnover ratio means gross revenues divided by the capital employed. In 2007, the gross revenues ratio was 0.73:1 which has fallen to 0.61:1 in 2008. No uncertainty the gross revenues have increased in 2008 but the per centum addition of capital employed is more than gross revenues which brings the ratio down.

One of the purposes of Glaxo Smith Kline has been fulfilling the demands of stockholders. The company despite of holding some lessening in net income over last three old ages has been paying good sum of involvement to its stockholders. In 2008 Glaxo Smith Kline paid ?2929m dividend to stockholders as compared to a dividend of ?2793 in the twelvemonth 2007 which is more despite of a lesser net income. This shows the company ‘s committedness towards accomplishing its one of the chief end.

CASH FLOW STATEMENT ANALYSIS:

Harmonizing to Perks, Cash flow statements are a better index of fiscal public presentation of the company. A hard currency flow statement consists of hard currency from operating, puting and funding activities. Investors will be happy to see a positive operating activity and a negative investment activity in order to put in the company. A company can bring forth adequate net income but can non endorse itself with the hard currency flows so it is a bad mark in the context of investors. In the instance of Glaxo Smith Kline the company has a good net income along with a strong backup of its hard currency flows. The hard currency flow statement is good plenty to pull the investors for the company. The hard currency balance is 2008 is about three creases than in 2006.In 2008 the hard currency from operating activities was ?7205m which is much higher than ?4357m in the twelvemonth 2006. This shows the houses stableness and a good index of a fiscal public presentation.

PROBLEMS FACED BY USERS IN EVALUATING THE FINANCIAL STATEMENTS

Investors who are willing to put in a company should hold a proper cognition and counsel of the fiscal statement and fiscal informations of the company. This is the ground all the listed companies prepare an Annual Report which accounts for the company ‘s stewardship of assets and besides the information of the old twelvemonth. The Annual Report of the company consists of amalgamate balance sheet, an income statement, the statement of recognized income and outgo, the statement of hard currency flows and notes to fiscal statements.

Annual Report of a company is non easy to understand for users.A A user might confront several jobs in regard with analysis and rating of the fiscal statements. Following are the jobs which a user should see while measuring the fiscal statements of GSK in peculiar and in general:

  • Political and economical context: In political context, Government steps could impact the gross revenues of the company. In economic context, any alteration occurred in the accounting period such as costs impacting gross net income, receivables etc.
  • Investor in Glaxo Smith Kline does n’t necessary come from an accounting background which might make a job in understanding the footings of accounting statements
  • Ratios should be interpreted by the user with aid of notes to fiscal statement. For illustration in the study of Glaxo Smith Kline, there is note sing the major restructuring programme which a user demand to understand before ciphering the gross net income ratio because the programme had incurred a batch of cost which affected it.
  • A user should be able to understand that does the study give a true and just position of all the fiscal statements. Investors may take hazard if any company has misrepresented its fiscal statements. There is besides a hazard of window dressing. The faulty goods could be including in the gross revenues by a company stating that they will return the goods next twelvemonth.
  • The consequence of depreciation is besides an country of concern for the user. The net sum shown in the books of histories is calculated by subtracting accumulated depreciation from cost. This value is non an estimation of value of assets. The rating of concern on this footing becomes really hard.
  • Some ratios might be distorted. It means the ratios will non supply a just contemplation of the concern. This is by and large related to stock list turnover ratio. For illustration, when I was ciphering the Return on capital employed ratio, the ratio showed a batch of difference as compared to the ratio calculated by the company. This might make a job in the heads of investor as it became confusion in my head.
  • The statements in the study may change across different companies. Companies have a different ways of showing their fiscal statements. This might take to confusion in the heads of the investors.
  • There is a difference in the accounting policies. For illustration, companies adopt different methods of depreciation such as cut downing balance method or consecutive line method.
  • Some companies have subdivisions in different states. Glaxo Smith Kilne is spread all over the universe. Exchange accommodations jobs might originate which ciphering the ratios.
  • Glaxo Smith Kline is a immense company and has different medical merchandises. It becomes hard for the user to understand each and every merchandise and value the company.
  • Some companies increase their stock at the terminal of the twelvemonth which increases the net incomes and current assets in the fiscal statement. Investors will value the company on the footing of that increased net income which could halter their investing in future.
  • Calculation of EPS is a job. The computation of gaining per portion differ under IAS 33 and US SFAS 128.
  • Asset turnover ratio is of import usher to cognize the fiscal public presentation of the company. But this ratio is sometimes deceptive to users. In GSK the ratio has decreased despite an addition in sale and capital employed.

This study indicates a good fiscal public presentation of the company in context with the stockholders as they are having rich dividends from the company. Profitability ratios such as return on capital employed and gross net income ratio remains high but there is certain ruin in the ratios in 2008 as compared to other old ages. The major restructuring programme is the ground of lessening in the ratio and the portion monetary value of the company as the programme has incurred tonss of cost. The gross revenues of the company are increasing every twelvemonth which is a good mark for the company. The portion monetary value is increasing after the recognition crunch period which is another healthy mark for the company as the investors have trust for the company. One of the most of import things in valuing the company is the hard currency. Company ‘s hard currency flow is threefold in 2008 as compared to 2006. It is true that users might confront many jobs in understanding the fiscal statements of the company, but in the terminal the investors want to gain net income while selling the portions and receive dividend from the company.A Major restructuring programme has hampered the growing of the company to a certain extent. But when this programme falls in topographic point the company will be ensured of a success in the productiveness of its operations.